Unemployed, but the nest egg is large. Is social assistance OK?

Dear Liz: I am unemployed and taking a break from my job search. Although I have ample savings in a diversified portfolio that will last for many years if needed, my adjusted gross income is low (mostly capital gains from incremental asset sales). I think I’m eligible for low-income assistance programs for utility bills and health subsidies, but I’m hesitant to apply. These programs are actually meant for people in need and it doesn’t feel right for me to participate. Are there legal reasons why a high-net-worth/low-income household cannot apply for assistance? Is it ethical?

Answer: If you meet the income requirements for a program – and there are no asset limits that would preclude your participation – there is no legal reason why you should not participate.

However, if the program’s resources are limited, you may well have ethical concerns about seeking help because someone else needs more.

However, there is no reason to forego the tax credits that help reduce the cost of health insurance purchased through the Affordable Care Act exchanges. The program was intentionally designed so that most Americans, not just those most in need, could receive help paying their health insurance premiums.

After a stroke of luck, questions about what should happen with the money

Dear Liz: After selling my home and downsizing at age 84, I am cash rich for the first time in my life. My goal now is not so much to grow the money significantly, but rather to avoid taxes on my investments, as I would have to do with certificates of deposit. Are tax-free municipal bonds my best option or what would you suggest?

Answer: If you’re in a high tax bracket—around 32% or higher—the lower interest rates on municipal bonds can still give you a good enough return to make it worth buying. If you’re in a low tax bracket, the math doesn’t work as well.

Additionally, municipal bonds are not covered by FDIC insurance like a certificate of deposit. Investing in bonds involves some risk. The risk of default is minimal if you choose high-rated bonds, but your bonds could lose value if interest rates rise.

Consider using some of your money to consult with a fiduciary, fee-based planner who can help you find a strategy that reflects all aspects of your financial situation, not just your tax bill.

Getting your first paycheck means meeting Uncle Sam

Dear Liz: My child, who recently graduated, has found a job and is receiving a 1099 tax form for his income. I know he will have to file his taxes differently and pay both state and federal income taxes, but will he also make payments to the Pay social security? Will these months (and perhaps years) count toward his lifetime “credits” for paying into Social Security?

Answer: The company is paying your son as an independent contractor, not an employee. This means he has to file his taxes as a self-employed person. So yes, he will pay into Social Security – twice as much as employees who receive W2 wages.

Typically, Social Security and Medicare taxes are split between employees and employers. Both pay 7.65% of the employee’s wages, for a total of 15.3%. Self-employed people have to pay both halves.

Your son will not have taxes withheld from his income, so he will likely have to make quarterly estimated tax payments to avoid penalties. A tax professional can help him set up these payments and suggest legitimate expenses he can use to reduce his tax burden.

I would like to clear up some confusion about these proprietary funds

Dear Liz: Your last column on proprietary funds confused me. You mentioned that selling these funds can trigger capital gains tax. Isn’t it true that we can transfer investments directly from one asset manager to another and not receive a capital gain as long as the funds remain invested?

Answer: If you can transfer a fund from one investment company to another, it is probably not a proprietary fund. For example, Schwab, Fidelity, Vanguard and many other companies create funds bearing their names, but these investments can also be bought and sold at other brokers.

In contrast, proprietary funds typically lock clients into investments that cannot be transferred to another company. To get your money, you have to sell the fund, which can result in a tax charge. This is a significant disadvantage that investors should understand before investing their money in these types of funds.

Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions can be directed to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the “Contact Us” form at asklizweston.com.